Sanjay G. Reddy's blog on economics and other subjects

Tsipras’s non-traditional playbook: the default and the referendum

In an earlier comment I referred to the Greek default to the IMF as suggesting that the actions being taken in the crisis were far off the ‘equilibrium path’ in the sense that it was not obvious that they were part of a set of ‘best responses’ in game theoretic terms, given their presumed objectives. That having been said, it is not obvious that they are not either (as one might expect given the role of Yanis Varoufakis in the Greek government, notwithstanding his well-known and sensible scepticism about the subject). Recognizing that it can be foolhardy to produce strategic just so stories, here are two examples from the Greek side. (Of course, the side of the European creditors also deserves corresponding examination) .

First, the initial default to the IMF itself might be taken as a way for Greece to signal in the small its willingness to default more comprehensively, perhaps even if that results in other unanticipated consequences such as a possible forced exit from the Euro. The Greek government may hope that if the creditors’ perception of the likelihood that it may actually default if pushed to the wall is increased, that may cause them to moderate their demands. However, such an approach will work only if the default to the IMF is seen as signalling something about the Greek leadership (e.g. their perception of or willingness to tolerate reputational loss or future punishment by credit markets) that would not otherwise be known. To the extent that the consequences of a potential ‘Grexit’ are of a much larger scale than those of the initial default and involve qualitatively different kinds of costs, such a signal may be of limited value. Nevertheless, in the nearly proverbial game of ‘chicken’, which this situation partially resembles, showing that you are the type who will not back down even if costly to you is all important. In the bargain, Syriza gains some credit with its electorate, which had backed its way to power on a platform of standing up to the lenders. That credit may serve it well if it is forced to make other concessions later, allowing such concessions to be perceived as indicating an acceptance of the least worst deal rather than a lack of backbone.

Second, the reasoning underpinning the referendum has puzzled many people. Thursday’s Financial Times reported the following: “A Syriza source said that in the event of a Yes victory, Mr. Tsipras would not resign but head for Brussels – to tell creditors he would accept the proposals he rejected last Friday. If the creditors agreed, the deal would be approved by the Greek parliament, with backing from opposition parties. Mr. Tsipras would then call an election in September, seeking an outright parliamentary majority for Syriza, which is currently two seats short and relies on the backing of a rightwing nationalist party, the Independent Greeks. If a No vote won, the same source said, the Greeks might choose to end negotiations with creditors, leave the euro of its own accord and readopt the drachma’. This is a sketch of an almost complete decision tree, leaving out only what Tsipras would do if there was a yes vote but that the creditors did not any longer agree to the previous deal proposed, perhaps in light of further deterioration in conditions or in order to make a point of their own. Presumably the same option that would be chosen if there were a No vote would then become operative.

The masterful logic of this plan is that it leads to perceived popular support for whichever option wins and permits Tsipras to survive politically regardless of the outcome. In the event of a yes vote, it increases the likelihood of any difficult conditionalities imposed by a new loan agreement gaining the popular support necessary for them to be implemented. A yes vote may also make it less likely for European creditors to impose new conditionalities lest they now be perceived as the spoilers, and indeed may increase the moral pressure on them to agree ultimately to some form of outright debt relief. (However, they will be understandably reluctant to deal with Tsipras himself in that case, given that he has campaigned for a no vote). A no will make any subsequent default and possible departure from the Euro, if unavoidable, seem like a conscious act to save the national honour rather than a national defeat. It will also make it possible to face down the European creditors with a credible threat to default, and one which will make them appear to be opposed to a democratic decision, thus increasing the chances of concession (although the strength of contrary popular opinion in creditor countries must also not be underestimated). One must go beyond material considerations in order to characterize adequately the game theoretic ‘strategies’ and ‘payoffs’. Moreover, the ‘alchemy of politics’, in which social identities and interests are created and revised in the process of interaction, may be as much at issue as any strategic calculus: Syriza has sought to forge as much as to reflect public views. In the event of a national vote split down the middle, with no overwhelming winner, Tsipras will retain his freedom of maneuver. He is likely to be blamed by a large minority for whatever outcomes result, but will also maintain a plausible narrative of having heeded the people’s will. Regardless of the outcome, Tsipras will have the prospect of maintaining his political future, without unduly sacrificing the national interest either. By widespread agreement of external analysts, the country cannot return to a sustainable path of debt payments, let alone economic and social well being, without debt relief — whatever else it also needs — and that is not currently on offer from the creditors. The playbook is a non-traditional one, but now that is has been made use of, it is likely that others will use it.

It may be possible to make sense of the decision to hold a referendum but it has by all accounts been rushed and badly worded, and its intent and implications were widely perceived as obscure, including by the Greek people. It is hard to resist the inference that there was an unmet need for clearer communication, undermining the referendum’s ostensibly democratic rationale. Still, it would be strange to think of Greece as the primary site of the current democratic deficit in Europe. One can only hope, despite few signs, that the crisis will open a fuller debate on institutions and rules in the continent, in particular to correct the structurally flawed aspects of the design of the Eurozone by instituting shared responsibilities for reducing risks and addressing imbalances and the fuller sharing of benefits and burdens.

2 thoughts on “Tsipras’s non-traditional playbook: the default and the referendum”

Sir, Thanks so much for this well-informed and useful piece. May I suggest that this excellent article would benefit by going beyond the related actors and the European context. Regardless of its clumsiness, the referendum serves two important (additional) purposes: First, as Unger points out, action is the source of hope. This act of dissidence should resonate with the peoples of the South’. This referendum will hopefully set a precedence around the globe for democratic resistance to technocratic tyranny; second and relatedly, the referendum brings to sharp relief the contra-democratic nature of this policy hegemony. This observation would take us to, and beyond an institutional failure of the EU. While we welcome the focus on Greece, let us not forget that this is a replay of the struggles of the South against the international governance mechanisms during the past four decades . Nanthi